Chicago Tribune

September 2, 2001 Sunday, CHICAGOLAND FINAL EDITION

SECTION: Perspective; Pg. 1; ZONE: C

George W. Reagan?; Bush seems to be walking in another president's boots;

The similarities between President George W. Bush and President Ronal Reagan stretch far beyond their passion for going home to the ranch to chop wood. In President Bush's tax reduction plans, does the nation face the likelihood of a return of the kind of runaway deficits that defined the Reagan years and forced the shrinking of government under Bill Clinton?

By R.C. Longworth. R.C. Longworth is a Tribune senior reporter.

The latest news from Washington about disappearing surpluses and raids on Social Security trust funds brought pangs of nostalgia to fans of fiscal flimflammery whose memories go back 20 years or more.

When Ronald Reagan first became president, his aides were asked to run his tax-cut and spending plans through a computer armed with the known laws of economics to see what would happen. According to David Stockman, Reagan's first budget director, the computer predicted annual budget deficits of $200 billion or more. Appalled, the Reaganauts rewrote the laws of economics, pumped them into the computer and told it to think again. The computer, properly reprogrammed, predicted everything would be fine, whereupon Reagan, newly inaugurated, pushed his tax cuts through Congress, and the nation got budget deficits of $200 billion or more for the next 12 years.

This, in fact, was just what some economic doctors had ordered. Milton Friedman and other conservative economists had urged a tax cut, not as an end in itself but because they felt it would force cuts in the size and programs of government, which they despised.

But Reagan's increased defense spending and the Democratic Congress' refusal to trim social programs kept outlays up and created the deficit. A decade later, the accumulating deficits had produced a government debt too big to carry.

Reagan was long gone by then, and it was left to the Clinton administration to make Friedman's dream come true. Bill Clinton, in effect, finished the Reagan revolution, with welfare reform and other cuts that helped produce the surplus that went poof last week, when everybody was on vacation and hardly anybody was looking.

That's why the 10-year tax bill rammed through a compliant Congress by the new Bush administration sent a warm glow through cynics who hold to the Barnumesque belief that, with suckers being born every minute, they inevitably will form a majority of American voters.

The fact that the tax bill has wiped out the surplus and put the federal government back into deficit is no surprise. It was widely and publicly predicted by economists and other critics during the debate over the bill.

President Bush and his allies claimed that the surplus bequeathed to them by the Clinton administration would add up to a total of $5.6 trillion over the next 10 years. Of this, $2.6 trillion was earmarked for Social Security pensions. This left $3 trillion, which Clinton wanted to use to pay down the national debt, built up during those years of deficits.

Fine, said Bush. Give me a tax cut of $1.6 trillion over 10 years, he said--Congress whittled it down to $1.35 trillion--and we'll still have plenty left over to pay down the debt, plus a "contingency fund"--about $800 billion, although the exact figures tended to wander--to pay for wars or other unforeseen events.

This wasn't true, and enough people said so at the time that Bush and his aides must have known it.

First, that $5.6 trillion surplus assumed that nothing would change for 10 years. It assumed there would be no economic downturn to cut into tax receipts, although Bush argued that his tax bill would help combat the economic downturn that was going on at the moment. It assumed government spending would not go up, although Bush himself was calling for more spending on defense, education, prescription drugs for senior citizens and other programs. It assumed the population would stay the same, even though that population is forecast to grow by 25 million over the next 10 years and those extra citizens will need government services, which cost money.

The administration fudged the figures in other ways, too--most of them pretty complex but not beyond the wit of its economic advisers. For instance, if the national debt is paid down, the government saves money, because it pays less interest on that debt. If taxes are cut instead, then the interest payments are higher--about $500 billion higher over 10 years.

An independent report last month by the International Monetary Fund calculated that the tax cut, which is $1.35 trillion on its face, actually will cost the government nearly twice that much, about $2.5 trillion.

This, then, was the forecast by Bush's critics: The total surplus over 10 years would be $5 trillion, not $5.6 trillion. The total tax cut cost would be $2.5 trillion, not $1.35 trillion. That leaves a $2.5 trillion surplus.

But all--all--of that surplus belongs to Social Security. In fact, Social Security's share of the surplus, as we saw above, is $2.6 trillion. If the total surplus was only $2.5 trillion, this meant the administration would have to dip into the Social Security fund to pay its bills.

This was inevitable sooner or later. Nobody expected it quite this soon. But two things happened. Tax rebate First, Congress, recognizing that a 10-year tax cut wouldn't fend off a recession now, tacked on the tax rebate. It's an upside-down rebate: higher earners get bigger checks, up to $600, while lower earners get less, down to nothing, even though the poor are more likely than the rich to spend their rebates and stimulate the economy. Nevertheless, it probably will juice the economy now, which is good. But it will reduce government revenues by about $100 billion over the next two years.

Second, Clinton could claim only part of the credit for the way the deficit turned into a surplus on his watch. Mostly the budget reaped a windfall from the long-running boom, especially the bull market on Wall Street. The boom boosted tax receipts, including capital gains taxes from stock sales, beyond the government's wildest dreams.

The party's over now, on Wall Street and everywhere else, and so is that flood of tax money. That's Bush's bad luck, but again, everyone knew it was happening when the tax bill passed.

Again, no one expected it to happen so fast. In May, the Congressional Budget Office predicted a total budget surplus this year of $275 billion. That was less than four months ago. Now it says the surplus will be $153 billion. But even that is a phony, as the CBO admits, because it does not account for extra defense spending, or the president's priority education programs, or all the other things the administration wants to do.

Well, $153 billion is still a lot of money. But this year's total Social Security surplus is $157 billion all by itself. This means that, even on these impossibly roseate figures, the administration will raid the Social Security trust fund for at least $4 billion.

(The administration, which, unlike the CBO, has a political ax to grind, says the surplus actually will be $158 billion, leaving $1 billion worth of icing before it starts eating into the Social Security cake. Forget it. It also says there will be a $4 billion surplus next year, not counting Social Security, a $2 billion surplus in 2003 and a $6 billion surplus in 2004. Tape those figures to your refrigerator door, where you can check them as the bills come due between now and then.) But didn't Bush promise to never, ever dip into that Social Security fund?

He sure did, making statements such as this one: "Every dollar of Social Security and Medicare tax revenue will be reserved for Social Security and Medicare."

Read his lips

What we have here is a political sin, along the lines of his father's broken promise to never raise taxes. But economically, it's no big deal. The Social Security trust fund is a legally mandated surplus that was set up in 1983, on the recommendation of a commission led by Alan Greenspan. Its rules say that money collected for Social Security can be used only to buy government bonds, which are invested, and, when they come due, will be used to pay pensions.

How the government uses the money in the meantime--to pay down the national debt or to buy more guns or to pay Vice President Dick Cheney's electric bill--is immaterial.

In other words, George Bush isn't spending your pension. It's still there, safe and sound. In fact, it will be safe and sound for another 37 years, which is how long the trust fund will last, even as Baby Boomers retire and tap it. Sometime before then, some tweaking will be necessary to make sure it lasts longer than that. But then, Congress has been tweaking Social Security since it was founded in 1935, and it hasn't missed a payment yet.

This comforting fact, though, is bad news to Bush and others who want to privatize part or all of Social Security. To do this, they will have to ignore the solidity of that trust fund, to pretend it isn't there and that something drastic--privatization--is needed.

Incredibly, they are doing just that. Treasury Secretary Paul O'Neill has argued that the treasury bonds in the fund, backed by the full faith and credit of the U.S. government, are not "real" assets.

From here, it's only a short jump to argue that a trust fund that is not real doesn't have to be honored. In its entire history, the U.S. government has never defaulted on its bonds, but it may be impossible to reform Social Security as the administration wants without doing this.

Which takes us back to where we began, with Milton Friedman and Ronald Reagan. Reagan said he just wanted to cut taxes, but Friedman saw a deeper motive, to shrink government. Bush says he just wants to cut some more taxes but, by doing so, he and his aides are laying the political and psychological groundwork for an assault on Social Security.

GRAPHIC: PHOTO GRAPHICPHOTO: If the total surplus is only $2.5 trillion, President Bush will have; to cut into the Social Security fund to pay bills. AP photo by Susan Walsh.; GRAPHIC (color): (Cowboy boot with the presidential seal on it). Tribune photo illustration.; The ways things are going; Bush's job rating; The public: Who's to blame?; Sources: CNN/USA Today/Gallup Poll; - See microfilm for complete graphic.